Rising oil prices encourage shale producers, dissuade investors

By Mark Shenk on 6/13/2016

NEW YORK (Bloomberg) -- The oil market just hit a yellow light. Crude’s advance of more than 90% from a 12-year low earlier this year has U.S. shale producers starting to return to their drilling rigs, threatening to slow further gains. 

"The $50-to-$60/bbl area is the sweet spot," said Mark Watkins, the Park City, Utah-based regional investment manager for The Private Client Group of U.S. Bank, which oversees $128 billion of assets. "You start to have producers come back at $50, but a lot of them come in at $60."

Money managers were cautious in the week ended June 7, betting more heavily on a price drop than on further gains, according to data from the Commodity Futures Trading Commission. WTI rose 2.6% to $50.36/bbl on the New York Mercantile Exchange during the report week and fell 49 cents, or 1%, to $48.58 at 11:37 a.m. Singapore time on Monday.

Prices have climbed enough for Continental Resources to dispatch fracing crews to unfinished wells in the Bakken shale region, CEO Harold Hamm said June 9. Those wells were left uncompleted as tumbling prices forced explorers to halt projects to conserve shrinking cash flows. Helmerich & Payne Inc., the biggest drilling-rig contractor in the U.S., and Independence Contract Drilling Inc. said last week they were receiving more queries from oil explorers.

"Everyone is questioning the price when U.S. rigs come back," Paul Sankey, an energy analyst at Wolfe Research LLC, said June 10 on Bloomberg Radio. "At $55-to-$60 we would return to growth in the U.S."

The number of active oil rigs in the U.S. increased by three last week after jumping by nine in the prior seven days, the first back-to-back gain since August, Baker Hughes Inc. data show. U.S. crude production is still well below last year’s peak, and explorers have idled more than 1,000 oil rigs since the start of last year.

Forecasters including the International Energy Agency and Goldman Sachs agree that the crude glut is starting to dwindle as the Organization of Petroleum Exporting Countries’ policy of maintaining output squeezes out higher-cost rivals.

Global disruptions reached an average 3.6 MMbopd last month, the most since the EIA began tracking outages in 2011. Fires that began early May in Alberta took out an average 800,000 bpd of Canadian supply last month, while Nigerian crude output dropped to the lowest in 27 years as militants increased attacks on pipelines in the Niger River delta.

"In April and May, before the worst of the disruptions, there was already a consensus that the market would be in balance the second half of the year," said Michael Wittner, the New York-based head of oil-market research at Societe Generale SA. "Nigeria and Canada just accelerated the rebalancing."

Hedge funds’ short position in WTI rose by 24,324 futures and options combined to 77,701, the biggest percentage gain in 11 months, CFTC data show. Longs, or bets on rising prices, increased by 17,065, reducing the net-long position by 3%. 

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